Please help me choose 401k Bond Fund!

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guitarguy
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Please help me choose 401k Bond Fund!

Post by guitarguy »

Hello all,

It's been a while since I've done a portfolio review, but I'm starting a new job and would like to pick my funds to at least get the ball rolling. I'm sure I'll come back with lots more questions when I look at the whole picture, but for now I'll just mimic what I had with my old 401k and contribute new money 60% to SP500 index (all set with that one in the new 401k) and 40% into bonds. International and other stuff is all in Roth.

So, I'm set with the SP500 index fund. But I need to choose a bond fund (or a mix of bond funds). Can anyone please make a recommendation? My old 401k had only 2-3 bond fund choices and one was an index so the choice was simple. Here, I have more options like high yield, inflation protected, intermediate term, etc. None appear to be index funds. New 401k is at Fidelity, which I'm also new to. Here are my options:

Inflation Protected - PIMCO REAL RETURN (ER 0.37)
Intermediate Term - PIMCO CORE PLUS BOND (ER 0.37)
High Yield - NB HIGH INC BOND R6 (ER 0.62) NRHIX
Stable Value - INCOME FUND (ER 0.37)
Emerging Markets - FID NEW MARKETS INC (ER 0.86) FNMIX

Is it good to split between inflation protected and intermediate in this case maybe? I really need to know the benefits and pitfalls of each one to make the best choice(s).

Thanks very much in advance for the advice.

EDIT: Edited to include the ticker symbols...at least the ones I could find. For some reason I can't seem to find the others on my available funds list...
Last edited by guitarguy on Mon May 05, 2014 2:20 pm, edited 1 time in total.
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RyeWhiskey
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Re: Please help me choose 401k Bond Fund!

Post by RyeWhiskey »

Ticker symbols would be helpful but at a cursory glance I'd go with:
Intermediate Term - PIMCO CORE PLUS BOND (ER 0.37)
or
Inflation Protected - PIMCO REAL RETURN (ER 0.37)
or
Stable Value - INCOME FUND (ER 0.37)

If the stable value fund has a guaranteed rate of return (like 3%) I'd probably take that for simplicity. If it's just a money-market fund then I'd go with one of the intermediate funds. If you don't know what the stated purposes of inflation-protected securities are then you should not buy them until you do. Go with the Intermediate Term CORE PLUS BOND fund while you read up on TIPS and then make an informed decision. :beer
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ogd
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Re: Please help me choose 401k Bond Fund!

Post by ogd »

guitarguy: I agree with RyeWhiskey above. Those three are some decent funds and there's no need to reach into the riskier and more expensive options with your safe money. Stocks are more than a handful when it comes to risk.

Also because of the 60% stock allocation, I'd use the Core Plus fund now rather than the inflation-protected. At 60/40, equities can take care of the inflation heavy-lifting and nominal bonds are a better way to balance through stock market hiccups.

As for choosing Stable Value or not: read http://www.bogleheads.org/wiki/Stable_value_fund to understand more about what they are. They can be a good option with high enough yields. I'd probably draw the line at 2% and use a regular bond fund if it's below that.
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HardKnocker
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Re: Please help me choose 401k Bond Fund!

Post by HardKnocker »

This would be my choice: Intermediate Term - PIMCO CORE PLUS BOND (ER 0.37)
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Phineas J. Whoopee
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Re: Please help me choose 401k Bond Fund!

Post by Phineas J. Whoopee »

HardKnocker wrote:This would be my choice: Intermediate Term - PIMCO CORE PLUS BOND (ER 0.37)
I'd agree unless the stable value fund's present return is above or not very much below that fund's SEC yield.
PJW
dickenjb
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Re: Please help me choose 401k Bond Fund!

Post by dickenjb »

Can't offer advice without knowing what the SVF is paying.
Topic Author
guitarguy
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Re: Please help me choose 401k Bond Fund!

Post by guitarguy »

Thanks for the advice so far everyone.

The SVF appears to be paying 2.X% over the past years. Is that large enough to just do that? Or, would there be any value (i.e. would it make any sense) in splitting these bond contributions 50/50 between the intermediate fund and the SVF?

Also I should note, my overall asset allocation isn't 60/40 stocks/bonds, but rather new money specifically being added to my 401k was split that way. My overall asset allocation is 80/20. Just wanted to mention that in case it made any difference in the recommendations.
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joe8d
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Re: Please help me choose 401k Bond Fund!

Post by joe8d »

Stable Value Fund.
All the Best, | Joe
Johm221122
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Re: Please help me choose 401k Bond Fund!

Post by Johm221122 »

guitarguy wrote:Thanks for the advice so far everyone.

The SVF appears to be paying 2.X% over the past years. Is that large enough to just do that? Or, would there be any value (i.e. would it make any sense) in splitting these bond contributions 50/50 between the intermediate fund and the SVF?

Also I should note, my overall asset allocation isn't 60/40 stocks/bonds, but rather new money specifically being added to my 401k was split that way. My overall asset allocation is 80/20. Just wanted to mention that in case it made any difference in the recommendations.
At over 2%, I'd take stable value.At 80% stocks , seems like good fit
John
peppers
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Re: Please help me choose 401k Bond Fund!

Post by peppers »

No harm in splitting the contributions between StVF and intermediate term. That's how I do it at my Fidelity 401k.
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ryk1861
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Re: Please help me choose 401k Bond Fund!

Post by ryk1861 »

In the current interest rate environment, I am a big fan of the stable value fund. My wife has one in her 401k, and that is where the FI for virtually her entire retirement portfolio resides. Check the current yield (and recheck regularly), and if it is in the 2-3% range or higher, it might be the best option.
Topic Author
guitarguy
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Re: Please help me choose 401k Bond Fund!

Post by guitarguy »

Well, I looked a little closer at the SVF, and its current yield (year-to-date, updated daily) is actually only 0.86%. The 1, 3, and 5 year marks are all 2.X% which is what I saw the first time I looked at it, and I overlooked the low current yield number.

Since the current yield is so low maybe I'm better off with the intermediate term fund.

EDIT: I also did some reading on TIPS...so at least now I understand what they are and how they work. But I'm not sure if it's advisable to hold them or not. I mean...how are you supposed to predict how inflation will look over the long term? Are TIPS something that most younger-ish investors (I'm 29) like me should generally hold?
dickenjb
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Re: Please help me choose 401k Bond Fund!

Post by dickenjb »

guitarguy wrote:Well, I looked a little closer at the SVF, and its current yield (year-to-date, updated daily) is actually only 0.86%.
Well that answers that. I would avoid the SVF and go intermediate bonds.

PS is that annualized year-to-date return, or YTD return which when annualized is more like 2%? As you have already seen, details matter.
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max12377
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Re: Please help me choose 401k Bond Fund!

Post by max12377 »

I have a similar Stable Value whose ytd is .86 but stated yield is 2.85. I've always wondered about that. Hoping someone can explain.
Johm221122
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Re: Please help me choose 401k Bond Fund!

Post by Johm221122 »

max12377 wrote:I have a similar Stable Value whose ytd is .86 but stated yield is 2.85. I've always wondered about that. Hoping someone can explain.
Year to date is year to date return.At what month is this .86 reported to be?
John
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guitarguy
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Re: Please help me choose 401k Bond Fund!

Post by guitarguy »

Johm221122 wrote:
max12377 wrote:I have a similar Stable Value whose ytd is .86 but stated yield is 2.85. I've always wondered about that. Hoping someone can explain.
Year to date is year to date return.At what month is this .86 reported to be?
John
To piggy back on this question, mine has an up-to-date value that says "updated daily". So, that's just the ytd performance of that fund, right?

How does the whole annualized thing fit into the equation?
Johm221122
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Re: Please help me choose 401k Bond Fund!

Post by Johm221122 »

guitarguy wrote:
Johm221122 wrote:
max12377 wrote:I have a similar Stable Value whose ytd is .86 but stated yield is 2.85. I've always wondered about that. Hoping someone can explain.
Year to date is year to date return.At what month is this .86 reported to be?
John
To piggy back on this question, mine has an up-to-date value that says "updated daily". So, that's just the ytd performance of that fund, right?

How does the whole annualized thing fit into the equation?
The annualized is what you should make in a year

John
Topic Author
guitarguy
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Re: Please help me choose 401k Bond Fund!

Post by guitarguy »

Johm221122 wrote:
guitarguy wrote:
Johm221122 wrote:
max12377 wrote:I have a similar Stable Value whose ytd is .86 but stated yield is 2.85. I've always wondered about that. Hoping someone can explain.
Year to date is year to date return.At what month is this .86 reported to be?
John
To piggy back on this question, mine has an up-to-date value that says "updated daily". So, that's just the ytd performance of that fund, right?

How does the whole annualized thing fit into the equation?
The annualized is what you should make in a year

John
So if it's 2.X annually but reading "ytd, updated daily" at 0.8%, is it possibly like it's earned 0.8% so far this year and by the end of the year it might be at 2.X%? Seems strange like that it would be stated like that.

Also, I should note the the performance has gone down over the 1-3-5-10 year numbers from 3.99, to 2.9, to 2.7, to 2.1 for the 1 yr...so I'm wondering if it's just been going down and it's now at 0.8, or if it's expected to be back up at 2 by years end. How do I find this out? If I were to call Fidelity, what specifically do I ask? I want to make sure I find out the right info...
Johm221122
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Re: Please help me choose 401k Bond Fund!

Post by Johm221122 »

Rates have fallen in last 10 years
Fidelity probably couldn't tell you what it will earn
If already .86 % do you think rest of year will be zero
Annualized return

https://www.portfoliomonkey.com/home/glossary
John
placeholder
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Re: Please help me choose 401k Bond Fund!

Post by placeholder »

As the others have said you're looking at the YTD return not annualized rate so your plan documents should explain how the fund works like at mine they set a new rate quarterly so you rarely get a particular rate for the entire year but instead it will be some average of the four rates over the year's time.
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guitarguy
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Re: Please help me choose 401k Bond Fund!

Post by guitarguy »

Johm221122 wrote:Rates have fallen in last 10 years
Fidelity probably couldn't tell you what it will earn
If already .86 % do you think rest of year will be zero
Annualized return

https://www.portfoliomonkey.com/home/glossary
John
OK, thanks. I'm just trying to understand how this works.

So as of today, the ytd return is down to 0.64%. Based on the math in that above link, the calculated/expected annualized return would be 1.93%. Calculated with yesterday's rate of 0.86%, the annualized return comes out to 2.6%...quite a difference. Now I'm not into watching this stuff on a daily basis...but are these types of fluctuations normal?

If this ytd return that they're displaying is cumulative, why does it go down? Is it some kind of average?

Thank you very much for helping a newb with this stuff.
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RyeWhiskey
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Re: Please help me choose 401k Bond Fund!

Post by RyeWhiskey »

guitarguy wrote:
Johm221122 wrote:Rates have fallen in last 10 years
Fidelity probably couldn't tell you what it will earn
If already .86 % do you think rest of year will be zero
Annualized return

https://www.portfoliomonkey.com/home/glossary
John
OK, thanks. I'm just trying to understand how this works.

So as of today, the ytd return is down to 0.64%. Based on the math in that above link, the calculated/expected annualized return would be 1.93%. Calculated with yesterday's rate of 0.86%, the annualized return comes out to 2.6%...quite a difference. Now I'm not into watching this stuff on a daily basis...but are these types of fluctuations normal?

If this ytd return that they're displaying is cumulative, why does it go down? Is it some kind of average?

Thank you very much for helping a newb with this stuff.
There are different ways of displaying yield and return. All we laypeople need to know is: what, generally speaking, can I expect to return on this asset and at what risk?

Generally speaking, your stable value fund will return somewhere between 2% and 3%. This year it may be 1.96%. Next year it could be 3%. Who knows. The point is that the stable value fund is not sensitive to interest rate risk like the bond fund. Generally speaking, the bond fund could get you 4% but if interest rates rise 1% and it has a 6 year duration it would lose 2% rather than gain 4%. So the bond fund has more risk of loss than the stable value fund, but a higher possible return as well.

These general outlines are what ought be considered when making simple asset allocation decisions. The specifics will fill themselves in over time and you can reassess at a later point if you feel it necessary. :beer
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Topic Author
guitarguy
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Re: Please help me choose 401k Bond Fund!

Post by guitarguy »

RyeWhiskey wrote:
guitarguy wrote:
Johm221122 wrote:Rates have fallen in last 10 years
Fidelity probably couldn't tell you what it will earn
If already .86 % do you think rest of year will be zero
Annualized return

https://www.portfoliomonkey.com/home/glossary
John
OK, thanks. I'm just trying to understand how this works.

So as of today, the ytd return is down to 0.64%. Based on the math in that above link, the calculated/expected annualized return would be 1.93%. Calculated with yesterday's rate of 0.86%, the annualized return comes out to 2.6%...quite a difference. Now I'm not into watching this stuff on a daily basis...but are these types of fluctuations normal?

If this ytd return that they're displaying is cumulative, why does it go down? Is it some kind of average?

Thank you very much for helping a newb with this stuff.
There are different ways of displaying yield and return. All we laypeople need to know is: what, generally speaking, can I expect to return on this asset and at what risk?

Generally speaking, your stable value fund will return somewhere between 2% and 3%. This year it may be 1.96%. Next year it could be 3%. Who knows. The point is that the stable value fund is not sensitive to interest rate risk like the bond fund. Generally speaking, the bond fund could get you 4% but if interest rates rise 1% and it has a 6 year duration it would lose 2% rather than gain 4%. So the bond fund has more risk of loss than the stable value fund, but a higher possible return as well.

These general outlines are what ought be considered when making simple asset allocation decisions. The specifics will fill themselves in over time and you can reassess at a later point if you feel it necessary. :beer
Thanks for the layman breakdown.

After reading a bit more about SVFs and having it sync in a bit more with this explanation...I think I'm most comfortable going with either this SVF or possibly a split between that and the intermediate term fund. I may just stick with the SVF for simplicity though, unless there is a good reason to split it up. Any thoughts?
Johm221122
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Re: Please help me choose 401k Bond Fund!

Post by Johm221122 »

Nobody knows what will be best.50/50 bonds and stable value is a good fit, I use mostly use stable value because my cheapest bond fund is almost 1.5%..The question you have to answer is do you want the Pimco fund?
John
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guitarguy
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Re: Please help me choose 401k Bond Fund!

Post by guitarguy »

Johm221122 wrote:Nobody knows what will be best.50/50 bonds and stable value is a good fit, I use mostly use stable value because my cheapest bond fund is almost 1.5%..The question you have to answer is do you want the Pimco fund?
John
Yeah...I answered that myself already actually.

I decided on "diversifying" the bond funds and went with the 50/50 split between that SVF and the Pimco. I'm thinking it's a good strategy to mix it up there since the ER is the same.
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